MacDonald (Inspector of Taxes) v Dextra Accessories Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Jonathan Parker,Mr Justice Charles,Lord Justice Potter |
| Judgment Date | 28 January 2004 |
| Neutral Citation | [2004] EWCA Civ 22 |
| Docket Number | Case No: C3 2003 1077 CHRVF |
| Court | Court of Appeal (Civil Division) |
| Date | 28 January 2004 |
[2004] EWCA Civ 22.
Court of Appeal (Civil Division).
Jonathan Parker and Potter L JJ and Charles J.
Timothy Brennan QC and Hugh McKay (instructed by the Solicitor of Inland Revenue) for the Crown.
Andrew Thornhill QC (instructed by Levy Watters) for the taxpayers.
The following cases were referred to in the judgment:
EMI Group Electronics v Coldicott (HMIT) TAXWLR[1999] BTC 294; [2000] 1 WLR 540
Hochstrasser v Mayes ELR[1960] AC 376
Peat v Gresham Trust Ltd ELR[1934] AC 252
Ramsay (WT) Ltd v IR Commrs ELR[1982] AC 300
Re Cutts WLR[1956] 1 WLR 728
Westmoreland Investments Ltd v MacNiven (HMIT) TAX[2001] BTC 44
This was an appeal by the Inland Revenue from the decision of Neuberger J ([2003] BTC 472) dismissing its appeal against a decision of the special commissioners ((2002) SpC 331) that s. 43(11) of the Finance Act 1989 did not prevent the participating companies from deducting payments into an employee benefit trust ("EBT") in computing their corporation tax liability.
Before the special commissioners a number of appeals were heard together relating to the deductibility of payments to an employee benefit trust (EBT) by six group companies and the taxability and liability to National Insurance contributions (NICs) of the allocation of funds within the EBT on sub-trusts for three director-shareholder, and the wives and the mother of two of the directors. The group sold mobile telephones and mobile air time. It was extremely successful growing from 30 employees in 1989 to a staff of 2800 in 2000.
The Revenue took the view that the scheme involving the EBT fell foul of the principles laid down by the House of Lords in WT Ramsay Ltd v IR Commrs [1982] AC 300. In relation to the companies they said that s. 43(11) of the Finance Act 1989 ("FA 1989") prevented the deduction of payments into the EBT until the employee was taxed on the fund as an emolument. In relation to the six individual taxpayers it was said that the allocation of funds within the EBT to sub-trusts for individual directors and their families was taxable either as an emolument for income tax, or earnings for NICs, or was chargeable to income tax only as a benefit in kind under s. 154 of the Income and Corporation Taxes Act 1988 ("ICTA 1988"); Alternatively, loans made to the six from the EBT out of the funds allocated to their respective sub-trusts were emoluments or earnings.
The special commissioners held that beneficiaries under the trust were not taxable or liable to NICs on allocations to sub-funds, or on loans from the sub-funds ((2002) SpC 331). The High Court dismissed the Revenue's appeal ([2003] BTC 472). The only issue before the judge was as to the application of s. 43 and in particular the definition of the expression "potential emoluments" in s. 43(11)(a). The special commissioners held that "with a view to their becoming relevant emoluments" in s. 43(11)(a) meant that for the subsection to apply the contributing company's purpose in making the payments to the trustee, the intermediary, had to be that the funds should be used to provide emoluments and that the companies had no such purpose since the funds were to be used as provided by the EBT. The judge held that "with a view to" meant that the test was one of "principal or dominant intention". The Revenue appealed to the Court of Appeal. The issue was whether the contributions made by the taxpayers to the EBT in December 1998 fell within s. 43. That depended on whether those contributions, when received by the trustee, constituted "potential emoluments" as defined in s. 43(11)(a), as being "amounts … held by an intermediary with a view to their becoming relevant emoluments". It was accepted that the trustee of the EBT was an "intermediary".
Held, allowing the appeal:
1. Given that funds subject to the EBT funds might be applied otherwise than in the provision of emoluments, it was not necessary for the purposes of the appeal to assign a precise meaning to the word "emoluments" in s. 43.
2. The effect of s. 43(1) and (2) was to postpone deductions by employers in respect of emoluments to which s. 43 related until such emoluments were paid - i.e. until they were received (see s. 43(12) and s. 202B of ICTA 1988). The inference must be that in enacting s. 43 Parliament was concerned that, in relation to emoluments falling within the section, and subject only to the nine-month "period of grace" provided for by s. 43(1)(c), no deduction for tax purposes should be available to an employer in respect of such an emolument until a matching liability to tax had accrued on receipt of that emolument by the employee. To that extent, Parliament was plainly concerned to achieve "fiscal symmetry".
3. The special commissioners and judge had fallen into the trap of glossing the statutory words and thereby attempting to rewrite the statute. If Parliament had intended to say "for the sole purpose of " (as the special commissioners held) or "with the principal or dominant intention of" (as the judge held), no doubt it would have done so. Further, the judge's test of a "principal or dominant intention" seemed to be unworkable when applied to a discretionary trust.
4. The expression "with a view to" was a less specific expression than "for the sole purpose of" or "with the principal or dominant intention of" and suggested a degree of flexibility of meaning and application, although the word "view" plainly connoted some element (albeit undefined) of purpose, intention or contemplation. In the particular context of s. 43(11)(a) it was looking to the future: the relevant "view" was a view as to a particular future event, viz. "potential emoluments" becoming "relevant emoluments". Further, the expression "with a view to", when coupled with the word "potential", indicated that the future event in question was one which might or might not occur: it was enough that it should have the potential to occur.
5. In the present case, the purposes or intentions of the trustee (to the extent that it had any) as to how and in whose favour it would or might exercise its discretionary powers in the future could not be a relevant consideration in determining whether the funds in question were held "with a view to … their becoming potential emoluments". Having regard to the findings of fact made by the special commissioners the sole criteria in making that determination were the terms on which the funds were held by the trustee, i.e., in the first instance at least, the EBT itself.
6. It followed that whilst the relevant date for applying the statutory test for "potential emoluments", at least where the employer's accounts for the accounting period in question had not been drawn up by the end of the nine-month "period of grace", was the end of that period, the manner in which the trustee had exercised its powers in the period since the contribution in question was made was not necessarily a relevant consideration. It would only be relevant to the extent that, by the exercise of its fiduciary powers, the trustee had effectively altered the terms on which the funds in question were held. On the facts of the instant case, the expression "with a view to" was apt to embrace the whole range of realistic possibilities available to the trustee, acting in accordance with the EBT.
7. The fact (accepted by the Revenue) that the EBT empowered the trustee to apply funds subject to the EBT otherwise than in the provision of emoluments did not have the effect of taking contributions to the EBT outside the definition of "potential emoluments" in s. 43(11)(a). That conclusion meant that if and to the extent that the trustee applied funds otherwise than in the provision of emoluments no deduction in respect of such application would ever be available to the contributing company. But that was the inevitable result of the arrangement which the respondents had, for their own proper purposes and on expert advice, elected to set up. Moreover it had also to be borne in mind that if the respondents were right the result would be that deductions in respect of applications by the trustee in the provision of emoluments would not be postponed, and Parliament's intention in that respect frustrated.
Jonathan Parker LJ: Introduction
[1] This is an appeal by the Revenue from an order made by Neuberger J on 15 April 2003 ([2003] BTC 472) dismissing its appeal from a decision of the special commissioners (Dr John Avery-Jones CBE and Mr A Edward Sadler) dated 3 September 2002 ((2002) SpC 331). Although additional issues were raised before the special commissioners, the only issue before the judge was as to the application to the facts of the instant case of s. 43 of the Finance Act 1989, and in particular the definition of the expression "potential emoluments" in s. 43(11)(a).
[2] In broad terms, s. 43 is concerned with the time at which an employer, in computing its liability for corporation tax, may make a deduction in respect of emoluments provided or to be provided to his employees. Again in broad terms, the effect of s. 43(1) and (2) is that where an emolument is not paid within nine months after the end of the period of account in which it was "allocated", no deduction in respect of that emolument may be made by the employer in computing its liability for corporation tax until the end of the period of account in which the emolument is actually paid. Thus the broad effect of s. 43(1) and (2), where those subsections apply, is to postpone a deduction in respect of an emolument until there is a matching taxable receipt of the emolument by the employee. Section 43(11) extends the operation of s. 43 to "potential emoluments" as there defined.
[3] The respondents to the appeal are six members of a group of companies known as the Caudwell Group. The Caudwell Group carries on the business of selling mobile telephones and mobile airtime: a...
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